September 27, 2017

Banking Agencies Propose Simplification of Capital Rule

The Office of the Comptroller of the Currency ("OCC"), the Board of Governors of the Federal Reserve System ("FRB") and the FDIC (collectively, the "agencies") issued a notice of proposed rulemaking that would simplify capital rules for banking organizations that are not subject to the "advanced approaches capital rule." In particular, this rulemaking applies to community banks.

The agencies are proposing to make changes related to the treatment of certain loans, items subject to threshold deduction, and minority interest requirements. The proposal would:

  • replace the high volatility commercial real estate exposure ("HVCRE") category with a simpler exposure category called high volatility acquisition, development, or construction exposure ("HVADC"). The HVADC category is substantively simpler to implement and would carry a lower risk weight (130 percent) as compared to the HVCRE category (150 percent). However, the HVADC category would capture more acquisition, development, and construction loans than the HVCRE category.

  • simplify the regulatory capital treatment of mortgage servicing assets ("MSAs"), deferred tax assets ("DTAs") and investments in the capital of unconsolidated financial institutions.

  • simplify the calculation of minority interest limitations.

On August 29, 2017, the agencies proposed extending transitional capital treatment provisions that are set to expire at the end of 2017 (see previous coverage). Whether or not the transition extensions are finalized, they would cease to be effective upon the adoption of a final rule for the proposed simplifications.